Question

Sunshine Inc has no debt outstanding and a total market value of $308,100. Earnings before interest and taxes, EBIT, are projected to be $46,000. If economic conditions are normal. If there is strong expansion in the economy, then EBIT will be 20% higher. If there is a recession, the EBIT will be 31% lower. The company is considering a $160,0000 debt issue with an interest rate of 5%. The proceeds will be used to repurchase shares of stock. There are currently 7,900 shares outstanding. Ignore taxes for questions a and b. Assure the company has a market to book ratio of 10 and the stock price remains constant. a1. Calculate Return on Equity (ROE) under each of the 3 economic scenarios before any debit is issued. a2. Calculate the percentage changes in ROE when the economy expands or enters a recession. b1. Assume the corp. goes through with the proposed recapitalization. Calculate the Return on Equity (ROE) under each of the three economic scenarios. b2. Assume the firm goes through with the proposed recapitalization. Calculate the percentages changes in ROE when the economy expands or enters a recession. Assume the firm has a tax rate of 24% c1. Calculate return on equity(ROE) under each of the three economic scenarios before any debit issued. c2. Calculate the percentage changes in ROE when the economy expands or enters a recession. c3. Calculate the return on equity(ROE) under each of the three economic scenarios assuming the firm goes through with the recapitalization. c4. Given the recapitalization, calculate the percentage changes in ROE when the economy expands or enters a recession.

A1	Recession ROE		%
	Normal ROE		%
	Expansion ROE		%
A2	Recession Percentage change in ROE		%
	Expansion Percentage change in ROE		%
B1	Recession ROE		%
	Normal ROE		%
	Expansion ROE		%
B2	Recession Percentage change in ROE		%
	Expansion Percentage change in ROE		%
C1	Recession ROE		%
	Normal ROE		%
	Expansion ROE		%
C2	Recession Percentage change in ROE		%
	Expansion Percentage change in ROE		%
C3	Recession ROE		%
	Normal ROE		%
	Expansion ROE		%
C4	Recession Percentage change in ROE		%
	Expansion Percentage change in ROE		%

Answer 1